For decades now, Walmart (WMT +0.82%) has mostly been a boring stock.
The Dividend Aristocrat has long delivered reliable income for investors and moderate growth at a modest valuation, and as the world's largest retailer and biggest company by revenue, its strengths are evident.
Under CEO Doug McMillon, however, the company has been pushing beyond its traditional core as a brick-and-mortar retailer, becoming the country's second-largest e-commerce business with initiatives like online grocery pickup and delivery and a push to build out its own third-party marketplace. However, another strategy under McMillon has gone largely ignored by investors, and it could be a source of huge value in the future.
Image source: Walmart.
Making an investment in tech
Walmart has forged deals with high-growth tech companies, taking a 77% stake in Flipkart, India's biggest e-commerce company, in 2018. In 2016, the retail titan acquired a 5% stake in JD.com (JD +8.30%) as part of a strategic alliance with the Chinese e-commerce company that also runs its own logistics network. Since then, JD stock has nearly quadrupled, valuing Walmart's stake at about $6.5 billion. Another 2016 deal to acquire Cornershop, a Latin American grocery delivery company, was blocked by regulators.
So when reports came out last week suggesting that Walmart was teaming up with Microsoft to make an offer for TikTok, the popular Chinese social media app, some investors were quite surprised. But the move fits Walmart's broader strategy of investing in growth companies in emerging markets. TikTok also has potential beyond just being a social media app. Bytedance, the owner of TikTok, operates a very similar app in China called Douyin and it has become an e-commerce destination. TikTok has embedded a "Shop Now" app in recent months that uses features already available on Douyin, and the sales potential from a captive social media audience is apparent. Facebook is building out similar e-commerce capabilities on both its namesake app and Instagram to mimic Douyin's efforts.
Walmart explained the potential investment move by saying, "The way TikTok has integrated e-commerce and advertising capabilities in other markets is a clear benefit to creators and users in those markets. We believe a potential relationship with TikTok U.S. in partnership with Microsoft could add this key functionality and provide Walmart with an important way for us to reach and serve omnichannel customers as well as grow our third-party marketplace and advertising businesses."
But where did Walmart get the idea to go this direction, striking deals with Flipkart, JD.com, and now potentially TikTok? Well, there is a sort of playbook for doing this already.
Following the Alibaba/Tencent template
Tech giants Alibaba (BABA +3.50%) and Tencent (TCEHY 1.12%) loom large over the Chinese economy. Alibaba operates the country's biggest e-commerce marketplaces, including Tmall and Taobao, and generated more than $1 trillion in gross merchandise volume in its last fiscal year. Tencent owns the popular WeChat super app, which is used for everything from messaging to gaming to broadcasting to social media and videoconferencing.
Beyond their core businesses, both companies are also prolific investors in other Chinese (as well as international) companies and have formed a network of partnerships that reinforce their competitive advantages. Alibaba, for example, owns stakes in Baozun, logistics operator ZTO Express, Southeast Asian e-commerce business Lazada, and ridesharing app Didi, in addition to a strategic partnership with Starbucks.
Tencent, on the other hand, holds stakes in JD.com, Sea Limited, electric car-maker NIO, and Fortnite-maker Epic Games. Those investments and relationships have delivered significant value to investors, and strengthen both companies' leadership in China's tech economy.
What it means for Walmart
As the world's largest retailer, Walmart has a lot in common with Alibaba and Tencent in its scale and dominance, but the company's brick-and-mortar business has hit a ceiling. In the U.S., it's fully saturated the market with stores -- and though it continues to open new locations internationally, it's clearly focused on e-commerce outside of its home market as well, given its investments in India-based Flipkart and China-based JD.com.
Taking a stake in TikTok would be a significant step forward for Walmart in its e-commerce strategy, but even if the deal falls through, it shows Walmart is focused on making investments in emerging tech companies that it can leverage with its massive scale and retail and logistics expertise -- meaning more deals are likely to come in the future, whether or not its TikTok pursuit is successful.
As Walmart continues to transition beyond its traditional brick-and-mortar confines, the stock may deserve a higher earnings multiple. This is no longer the stodgy retailer it was a decade ago.
